The multiples of operating cash flow that I use to value all of our model portfolio companies are based on several factors, but the most important is my view of each company's up-side / running room in the undeveloped assets they hold. Debt is also taken into consideration.
An upstream company with a reasonable amount of debt and enough development inventory to hold production flat, should trade for 6X to 8X operating CFPS.
Debt: All debt is not the same. Your credit card debt is not the same as your home mortgage. If "Accounts Payable" (debt due today) is higher than Cash + Accounts Receivable, that is a Red Flag. Long-term debt should match up with long-term assets. Also, look at when the long-term debt is due. LT Debt due at the end of 2017 is more of a concern than LT Debt due in 2022.
Production mix is also considered. "BOE's" are not created equal.
Yes, I do change the multiples. In fact, several were raised after I saw Q2 results. The multiples are "forward looking", so when a company raises their production guidance the multiple should go up.
Think of my valuations as the price I believe the company would sell for in a takeover. Over the years, my valuations have been very close to previous takeovers. My team at Hess did this for years, so a lot of it is my "gut feeling", based on decades of experience.
PS: GAAP accounting rules can best be described as "BS" for upstream oil & gas companies. GAAP rules are super conservative and give almost no value to exploration & development upside. When a large-cap takes over a small-cap, they are doing it to get their resource potential. For example, what Continental Resources (CLR) now holds in SCOOP & STACK is probably worth 10X the book value of those assets.
I do compare my forecasts for Revenue, EPS and CFPS to what First Call is showing. If my forecast is way off from what First Call is showing I always double check the numbers.
